One big hurdle I continually run into is brokers and / or sellers that don't understand working capital, primarily the fact that the valuation on the business assumes ongoing working capital in the business. Most sellers I've been communicating with think that they should be able to take all of the AR (and assume the AP) since "they did the work". Which, I'd be okay with in exchange for a commensurate reduction in company valuation, since I'd have to fund the new working capital with additional cash. But, they want the 4-5x EBITDA valuation plus take the working capital, which can be the equivalent of 1-2x EBITDA in some cases.
Part of the problem is that there are many brokers who don't understand this point either, and advertise the deals as "cash-free, debt-free, and receivables-free".
Any tips or ideas on how to get people to understand this point?
How to get brokers / sellers to understand working capital?
by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management
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Some of the smaller brokers try to use a more simplistic method like 3 months of expenses. The only circumstance where a ballpark estimate like this makes sense is if the company's balance sheet is not reliable. I would typically go through the exercise of doing a true representation of working capital and show/ explain my work (mainly how it's fair for buyer/ seller and show scenario A and B which are more favourable for buyer vs seller, etc.).
If the broker is bull headed and this is the last point of consideration in your LOI. I usually just let the broker know that I'm not trying to ring out a few extra dollars here and we can just include a clause in the LOI that it's subject to DD and let the QofE experts on our side and the accountants on the seller side determine this number in a fair manner post-LOI.